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My September 11th edition was entitled The Next Big Bubble: Alternative Energy, and it's a pretty good read. I used the phrase "a shared speculative hallucination" to describe economic bubbles. In the article, I stated that one of the four key drivers of bubbles as "Legislation guaranteeing favorable tax status must come out of Washington".

Thanks to the massive news flow out of Washington on the bail out plan, not many noticed the Senate passed bill yesterday providing more than $17 billion in renewable energy tax incentives for wind and solar. The bubble in Alternative Energy is coming, and shareholders of China Energy should benefit when it does.

Late yesterday, I published a new BLOG on China Energy Recovery- it contains a couple of observations about recent news and some thoughts on the technical volume requirements to see this stock trade higher. Please give it a read and submit any questions or comments.

The BLOG is your opportunity to ask questions and offer comments. I will make an effort to answer every legitimate question. If I don't know the answer, I will contact the management and get the answer. Alternatively, if you have questions you don't want publicly displayed, you can always email me directly at editor@otcjournal.com. If you submit a comment or question, it will not appear on the site until I have responded.

To use the BLOG, simply go to the home page at www.otcjournal.com - the BLOG scrolls down from the upper right hand corner. The most current journal entries appear on the right hand side of you screen. Check back frequently for updates particularly when stocks are moving to overbought or oversold levels in volatile markets.
 

RTO 2.0: Congress and Cameras

There's no windbag like a member of Congress in front of a camera, and members of the Senate Banking committee have been filled with hot air over the past two days.

Here's my thesis today: When Congress passes RTO 2.0- the $700 billion bail out package of the American banking system, the market is going to go nuts to the upside. The market will finally be willing to accept the idea that things are going to get better, and start bidding up equities.

Congress is going to pass the proposition. They have no choice. However, the market is listening to the noise coming out of the mouths of these bozos, and it isn't buying into the eventual passage- yet.

These legislators on the Senate Banking commitee have the opportunity to get their mugs in front of cameras and pretend they are the great defenders of the American people. Believe me, it's just a bunch of grandstanding for the cameras. There's nothing a member of Congress likes more than a camera in their face and the opportunity to make a splash, no matter how ingenuous.

Here's the leader of the pack- Senator Christopher Dodd.

"What they have sent us is not acceptable," Senate Banking Committee Chairman Christopher Dodd (D., Conn.) said after the hearing Tuesday. "This is not going to work." How does he know it's not going to work? It was just a three page outline.

In essence, Paulson and Bernanke have gone up to the Hill with more of an outline than a plan. I believe a plan will take some time to develop, and needs to be flexible. Someone like Bill Siedman from RTC 1.0 needs to be annointed as the chief architect of the structure. I'm not sure who that person should be. That's what Congress should be discussing. Who it is willing to entrust to create the model.

I don't believe Bernanke or Paulson got us into this mess, and it makes me sick to my stomach to watch these Senators beat these guys down. Bernanke is calm, but Paulson just won't take it. The entire sub prime mortgage mess was a mass shared speculative hallucination, and all of those Senators on the banking committee were in their seats when this thing took root. Bernanke was an academic at the time, and Paulson was running Goldman Sachs. Talk about a guy who gave up a lot to go into Public service- Paulson is a great American whether you like him or not.

I don't believe you can blame this on any one entity. I also don't see it as a bailout of Wall Street. Believe me, the banks are getting absolutely murdered by death through accounting- Lehman Brothers and Bear Stearns are gone. Goldman Sachs is giving money to Warren Buffett in a sweet heart deal. The surviving investment banking firms will have to evolve their models to survive.

Do you know what's happening in the banking sector? Take a perfectly good performing AAA rated pool of mortgages- say it's worth $10 million. Thanks to the FASB regs and Sarbanes Oxley (the single stupidest piece of securities legislation in history), the accounting standards are forcing the bank to carry that $10 million pool at a valuation of about $5.2 million- which, by the way, was up from a low of $4 million. This is causing a major strain on balance sheets, and forcing banks to tighten down to nearly zero activity.

Senator Dodd- you are just wrong. In fact, it will work. This is a panic marketed with zero liquidity that is rippling through our banking system. So we put up a few bucks, buy in a fire sale, wait for markets to stabilize, and resell at higher prices. In the meantime, RTC 2.0 can buy distressed mortgages for pennies on the dollar, and negotiate favorable terms for mortgage holders. No one really wants to leave their home. So, let's make them more affordable.

In the 80's about 800 S&Ls closed their doors and left the RTC swimming in depressed real estate. Early buyers of that real estate made huge killings. As prices firmed, the American Tax payers benefitted as well.

The real estate market was a mess in 1990, and there was a nasty bear market as well. Just five years later, everything was hunky dory again and real wealth was created in the second half of that decade.

$700 billion is the estimate. It's not an expense, it's an investment. I believe the American tax payers could well get a great return on their investment. Let the banking system go down and foreclosures run rampant- it will cost a lot more in GDP losses, job losses, and unemployment benefits. I hope Congress moves before it gets more expensive.

I believe it will all be over in about a week. It makes sense to starting thinking about going long the market. In the next couple of days, I'll share a few ideas on how to do it.

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